Sydney view: Relentless Shell launches ingenious takeover bid

Shareholders in Fletcher Energy should be thankful they don't own shares in Woodside Petroleum.

It's not that Woodside is a bad company, but when Anglo-Dutch oil giant Shell wanted to take over Fletcher Energy, it had a receptive board which produced an outcome that included a heap of cash and some shares in two ancillary companies. They earned a premium for control.

Now that purchase has been approved by the Commerce Commission, Shell has turned its attention back to Woodside, where it would like to park most of its Asia-Pacific portfolio, including, some time in the future, the assets it is buying from Fletcher Energy.

The problem is, Woodside doesn't want to be taken over. And Shell, which owns a 34 per cent stake in its reluctant bride, doesn't want full ownership.

Woodside shareholders are caught in the crossfire.

The fun and games began in May when Shell made a proposal that would have lifted its stake in Woodside to 60 per cent in exchange for a suite of upstream assets and projects that it valued at $A7.9 billion.

The offer was rejected by the independent members of the Woodside board on several grounds: it didn't offer a suitable premium for control, they didn't like the mix of assets (too much gas and not enough oil) and they wanted projects that could offer greater growth in the future.

Shell did not accept their opinion. It wanted its proposal put to shareholders at an extraordinary meeting, but the Woodside independent directors refused, arguing that the proposal wasn't worth considering.

Now Shell has come back with a new and innovative offer, after months of deliberations with advisers Ord Minnett and Merrill Lynch and talks with institutional investors.

It is stunning for its complexity, but the strategy is simple. Shell wants to borrow enough shares from Woodside investors to lift its stake to 50.1 per cent, at which point it can force an extraordinary meeting so investors can vote on its merger proposal.

If the meeting approves, Shell will be able to pour a bunch of its Asia-Pacific assets into Woodside in exchange for 333 million shares, lifting its stake to 56 per cent. Those who sold shares to Shell so it could force the meeting would be allowed to buy them back for the same price.

Under Australian law you cannot borrow shares, because that would be warehousing.

So Shell has had to come up with an offer to tempt some, but not all, Woodside shareholders to part with their shares, at least temporarily. It has made a cash offer for Woodside of $A14.80 ($19.41) a share.

It is a derisory bid, but it is supposed to be. It does not offer any premium for control and is barely above the recent trading price.

Shareholders who accept the offer will receive a call option allowing them to buy back Woodside shares at the same price.

Shell argues that this will be attractive, because the suite of assets it will fold into Woodside will increase the value of Woodside shares by $A2.80 to $A3.20 each, lifting their notional value to around $A18.

It's an ingenious ploy, but it could be too clever by half.

Shell is asking Woodside investors to take a leap of faith. If they sell their Woodside shares at $14.80 and the merger is not approved, the call options automatically lapse and Woodside shareholders have effectively handed control of the company to Shell at a cheap price.

That should be the main defence of the Woodside board. It will argue that the takeover strategy is complex, with uncertain results, and in any case the cash offer simply does not offer a control premium.

That defence strategy will come unstuck, however, if Shell can convince a few key institutional shareholders to lend it some shares.

Once Shell has 50.1 per cent, the merger proposal will become very difficult to defend. The most Woodside could expect to achieve would be to extract a few more choice assets from the Shell portfolio.

It promises to be an intriguing battle: the might of an international oil giant and its clever advisers against a fiercely independent Australian producer and the political rhetoric of national interest.

* Giles Parkinson is editor of AFR.com.